It's Economic Theory, Stupid

As often as Carville's catch phrase has been recycled in its more popular form of "It's the economy, stupid" it doesn't quite hit the mark. While Carville's insight might lead to a political victory for a candidate, it does not necessarily lead to an economic solution. It is only an observation of the disease, not its cause. The cause, as we argued in "The Unraveling of Economics", is economic theory itself. In other words, our woes can be traced to the fact that there has never been a sound theory of economics.

Adding to the difficulty of selling such a radical claim is human nature itself. When you suggest to a liberal, libertarian, or conservative that your new theory is the first to make sense of protectionism you should expect the conversation to end right there. Why? Fundamentally, it is incorrectly perceived as a direct threat to their freedoms. What is not considered immediately is that economic freedom in the international space is potentially a threat to all your domestic freedoms you cherish (national security included). For example, your private property rights, as protectionist George Curtiss writing in the 1800s noted, become meaningless if your economic ability to acquire property is destroyed by free trade. In plain English, if you cannot find employment, the legal frame work protecting your foreclosed home won't mean much in any practical sense.

To grasp the consequences of gut-instinct economic policy, consider the press conferences given by Mr. Romney and President Obama regarding the Solyndra plant. While one man is a critique of stimulus and the other is the champion for it, notice the irony here. Both are promoters of free trade and yet see each other as antagonist. It is hard not to conclude something is deeply amiss in the national economic logic when opponents share the same intellectual economic foundation. To expose the error, simply recognize that protectionist Abraham Lincoln would have never made either speech. I would suggest, he would have recognized that neither Romney's "free markets", nor President Obama's stimulus was the correct approach to encouraging solar cell production. Instead, Lincoln would call for sky high tariffs for the entire economy (not just solar), without using a single penny of tax payer dollars to boot. Solar production would meet national demand under such a framework. It would not flee to China, nor need massive stimulus. Karl Marx if he had made the speech would have called for free trade as the fastest way to destroy capitalism. Could the irony be any greater here?

The greater intellectual tragedy of such economic stratagies lies in our forgotten economic heritage. Daniel Webster argued the primary reason we created our Constitution was to stop free trade (with Britian). The GOP were protectionists until the 1960s, while Democrats in contrast were free traders since the day of big-dollar cotton. So given the present-day national and academic obsession with free trade are we to believe the South who lost the civil war and owned slaves was more intellectually in tune with market economics than the industrial protectionist North who won the war? Clearly, you don't have to be an economist to sense something is fundamentally wrong with this line of reasoning. But given 200 years of defective economic reasoning across all schools (nearly all of which support free trade), exposing the key error in such reasoning is easier said than done.

To loosen the grip freedom fantasies have on all political party ideologies, a national debate over the foundations of various schools of economics needs to take place at the Congressional level. Unfortunately, this is the only way to pull the curtain back on the economic theater of the bizarre which has its audience under its spell. Seeds for such action could begin in the national press, but what nationally recognized business journalist is willing to risk his or her career with such unorthodox discussions?

To begin to understand why this needs to happen, ask a conservative to explain why the neoclassical theory of free trade hasn't prevented massive trade deficits. Ask a libertarian what the Austrian school's theory of wages amounts to. Ask a liberal how an expanded money supply can save a factory from the China price. In the end, you'll get a blank look. What this means in practice is that the average Joe or politician has no idea what his personal economic belief system is built on, giving free reign to mainstream economists gone wild. Even if Joe could answer the question, the various economic schools have never been challenged by a theoretical model which exposes the flaw they all share: The Quantity Theory of Money (See The Unraveling of Economics for details). Until the average politician takes the first baby step and recognizes that a distinction needs to be made between domestic free markets and free international markets, because money's function requires a closed economy to function properly as a "domestic arbitrary scale", then I would expect Adam Smith's intellectual failure to understand the source of Britain's subsistence wages to haunt us again.

Van Geldstone

meta:

Comments

There is no comparison to what Congress/Obama did and stimulus as prescribed by Keynesian economics. First, there was no closed loop to ensure only U.S. goods and services were used. Millions poured out to other countries, stimulating their economies and worse, hires went to foreign guest workers, not U.S. citizens, the taxpayers.

Next, it was bullet riddled with corruption, such as Solyndra and pet projects which were not stimulative or even hired one American. In the bigger picture, the money went to fat cats connected and not distributed down to the real people and small businesses. To see stimulative programs which were Keynesian you have to go to the New Deal and the Marshall Plan.

A stimulus recipient should have a viable chance of running on its own power. The Obama stimulus appeared to funnel money into projects that either on their own on in conjunction with ancillaries had little chance of starting up and running. The stimulus money was simply relegated to operating funds.